News poor, stocks up, nothing's new
Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?

The Market

    After an early morning sell off, the Averages (DJIA 12285, S&P 1314) rallied the rest of the day, closing within their intermediate term up trends (11878-15300, 1247-1676) and their short term trading ranges (11554-12405, 1247-1345).  The S&P once again traded into the 1290-1310 zone and bounced, making it the third day of building the right shoulder of a potential reverse head and shoulders formation.

    Volume was light; breadth improved; and the VIX sold off, leaving it within its current trading range (mildly positive for stocks).

    Gold (GLD) had a great day and remains in its intermediate term up trend.

    Bottom line:  once again, equities performed well in the face of disappointing news; and the S&P continued to build a reverse head and shoulders.  Technically speaking, both are positive for stocks; so it seems reasonable to expect more of the same.


  The economic news yesterday was mixed at best.  Weekly jobless claims were much higher than anticipated and the producer price index, especially the core, keeps pointing to higher inflation.  Both fit perfectly into our current forecast. 

Internationally, (1) Greece once again had to admit that it needs even more help to avoid bankruptcy.  That leaves open the question of the magnitude of any disruption in the EU financial system. (2) there were leaks that China will report higher than expected inflation which Angel doesn’t help global inflationary pressures and Beer raises the likelihood that it could further tighten monetary policy, i.e. raise rates putting more downward pressure on the dollar.

    Finally, after the Market close, Google reported disappointing profits and margins.  That should impact the early trading this morning.  How it influences the pin action for the rest of the day will depend on whether investors see this as the third edition of a developing pattern in this earnings season or continue to ignore sub par results.  On the other hand, it could be that investors recognize that first quarter corporate profits are going to come in below estimates and don’t care.  Nothing here encourages me.

    Bottom line: I can’t remember a time when the data tracked so closely with our Economic Model and yet equity prices were so detached from our Valuation Model.  It is a problem that I am stuck with and if I am correct that the technicals are pointing to higher prices then it is only going to get worse.   My solution which I consider the least worse alternative will be to continue to pay close attention to our Sell Discipline and Buy some more Portfolio insurance and non dollar denominated ETF’s (e.g. Canada)
     Thoughts on Investing--More wisdom from Paul Farrell

1. Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an excess in the opposite direction

Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras – excesses are never permanent

Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

5. The public buys the most at the top and the least at the bottom

That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree – something else is going to happen

As Sam Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

   This Week’s Data

    The March consumer price index (CPI) rose 0.5% versus expectations of an increase of 0.4%; core CPI was up 0.1% versus estimates of up 0.2%.

    The April New York Fed’s manufacturing survey came in at 21.7 versus forecasts of 15.5 and March’s reading of 17.5.


    By 2020 interest payments on the federal debt will be more than the deficit--roll that over in your mind (medium):

    Outbound volume at LA ports continues to grow (short):

    Debunking the mercantilist trade doctrine (short):

Posted 04-15-2011 8:09 AM by Steve Cook